BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 150| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: SB 150 Author: Nguyen (R) and Huff (R) Amended: 6/22/15 Vote: 21 SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 7/1/15 AYES: Hertzberg, Nguyen, Beall, Lara, Moorlach, Pavley NO VOTE RECORDED: Hernandez SENATE APPROPRIATIONS COMMITTEE: 7-0, 8/27/15 AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza, Nielsen SUBJECT: Personal Income Tax Law: exclusion: student loan debt forgiveness SOURCE: Author DIGEST: This bill excludes from gross income loan amounts discharged from a for-profit college when the borrower is unable to complete a program of study. ANALYSIS: Existing Law: 1)Provides that "gross income" includes all income from whatever source derived, including compensation for services, business income, gains from property, interest, dividends, rents, and royalties, unless specifically excluded. 2)Provides that debt that is forgiven or cancelled by a lender is generally treated as income on a tax return, and consequently is taxable. SB 150 Page 2 3)Provides that in the case of an individual, gross income does not include any amount which would be included by reason of discharge of any student debt if such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers. 4)Excludes loan amounts repaid or canceled by the United States Secretary of Education from gross income under state law. This bill: 1)Provides an exclusion from California gross income for income that would otherwise result from a forgiven student loan, as defined, of an eligible individual. 2)Provides an individual would be an eligible individual for a taxable year if any of the following apply during the taxable year: The individual is granted a discharge pursuant to the agreement between ECMC Group, Inc., Zenith Education Group, and the Consumer Financial Protection Bureau concerning the purchase of certain assets of Corinthian Colleges, Inc., dated February 2, 2015; The individual is granted a discharge pursuant to Paragraph 23 of the William D. Ford Federal Direct Loan Program Borrower's Rights and Responsibilities Statement because of either of the following: The individual could not complete a program of study because the school closed; or The individual successfully asserts that the school did something wrong or failed to do something that it should have done; or The individual attended a Corinthian Colleges, Inc., school on or before May 1, 2015, is granted a discharge of any student loan made in connection with attending that school, and that discharge is not excludable from gross income as a result of the reasons listed in 1 or 2, above. Comments SB 150 Page 3 1)Author's statement. According to the author, "Following the closure of 107 Corinthian College campuses, many former students are now seeking a partial or full discharge of their student loan debt. Unfortunately, if their debt is cancelled, discharged, or forgiven, that debt may be subject to state (and federal) income tax. To aid these students, Senate Bill 150 removes tax liability on forgiven federal loan debt for students who choose to forgo the credits that they earned. Nearly 13,000 California students are unable to complete their degrees but are still being held responsible for the student loan debt they incurred. These students have devoted time, energy, and resources in an effort to improve both their education and overall lives. Already victimized by the closure of the college, they should not be forced to forgo the credits they earned while also being subjected to tax debt. SB 150 helps students whose educational career is in limbo through no fault of their own to continue their education without being penalized financially." 2)How did we get here? Founded in 1995, Corinthian's for-profit colleges once included over 100 campuses across the country, where over 100,000 students were enrolled. A bachelor's degree from a Corinthian college could cost as much as $75,000. The vast majority of the school's revenue came from federal student loans, but federal loans are unable to cover all of the tuition, so students often had to take out private loans. The Consumer Financial Protection Bureau alleges that Corinthian kept tuition high in order to force students to borrow from the college at higher rates. The Corinthian loans came with origination fees of 6% and interest rates of around 15%, as of 2011, much higher than the 3% and 7% interest on federal student loans. Corinthian was a longtime target for federal and state regulators, with a host of investigations and lawsuits charging falsified placement rates, deceptive marketing, and predatory recruiting, targeting the most vulnerable low-income students. Since last July, the Department of Education has forced the company to close or sell off its locations over concerns about its high interest loans and misleading employment statistics. In February of this year, Corinthian announced that students SB 150 Page 4 would get $480 million in loan forgiveness under an agreement with federal regulators. Under the agreement, Corinthian would sell the majority of their campuses to the nonprofit ECMC Group, and students who attended ECMC Group campuses saw an immediate 40% reduction in the amount they owed on their private loans provided by Corinthian. The Department of Education also fined Corinthian $30 million for 947 representations of placement rates, findings that Corinthian disputed. Corinthian did not sell its Heald College campuses, located mostly in California, and they remained open until April 25, when they closed on a day's notice, leaving 16,000 students unable to complete their degree. Under federal law, students have a right to debt relief if they were enrolled at the time their college closed, or up to 120 days before the shutdown. The Department of Education extended that eligibility window for Heald students, allowing them to have their debts discharged if they withdrew any time after June 2014, when the department and Corinthian agreed to the sell the colleges. The Department of Education estimates that about 40,000 Heald students would be eligible for $544 million in debt relief if every student sought relief. In the past, only 6 percent of students whose colleges closed asked for their debt to be discharged. The Department of Education also estimates that if all 350,000 former Corinthian students over the last five years applied for and received the debt relief, that cost alone could be as much as $3.5 billion. 3)Reverse conformity. California law does not automatically conform to changes to federal tax law, except under specified circumstances. Instead, the Legislature must affirmatively conform to federal changes. Generally, when the federal government changes its tax laws, California catches up by enacting its own legislation the following year to reduce differences between the two codes, thereby easing the tax preparation burden on taxpayers, tax preparers, and the Franchise Tax Board. Currently, loans forgiven prior to the completion of a loan repayment program are included as taxable income under state law. If SB 150 becomes law, taxpayers would exclude from income the forgiven loan for state tax purposes, but include it for federal tax purposes, bringing California further out of compliance with federal law. SB 150 Page 5 FISCAL EFFECT: Appropriation: No Fiscal Com.:YesLocal: No According to the Senate Appropriations Committee, the Franchise Tax Board (FTB) estimates that the bill would result in General Fund revenue losses of $34 million in 2015-16, and $100,000 in both 2016-17 and 2017-18. The bill would not significantly impact the department's costs. SUPPORT: (Verified8/27/15) California Community Colleges Chancellor's Office State Board of Equalization Vice Chair, George Runner OPPOSITION: (Verified8/27/15) None received ARGUMENTS IN SUPPORT: The supporters of this bill argue that this bill will protect students who would incur a financial hardship from having to pay taxes on phantom income earned as a result of student loan debt forgiveness. Also, supporters argue this bill will help California students affected by the massive closure of Corinthian Colleges by granting relief on the state portion of their tax obligation. Prepared by:Myriam Bouaziz / GOV. & F. / (916) 651-4119 8/31/15 17:00:56 **** END **** SB 150 Page 6